April 2, 2012

LPL Restructures Debt, Will Start Paying Dividends

CFO Moore says restructuring reflects strength of balance sheet and will provide ‘financial flexibility’ but doesn’t ‘signal we are now in acquisition mode’

LPL executives celebrated their 2010 IPO. LPL executives celebrated their 2010 IPO.

LPL Investment Holdings Inc. (LPLA), parent company of the largest independent broker-dealer, LPL Financial, announced Monday that it has successfully refinanced its long-term debt, and that it will pay a special $2 dividend for shareholders in May, with the possibility of further dividend payments in the second half of the year. 

CFO Robert Moore said the refinancing will produce annualized savings to the company of about $10 million and “increased financial flexibility,” though he said that considering possible acquisitions is “just a portion of that flexibility,” and that the announcement is “not meant to signal that we are now in acquisition mode.”

(In January 2012, LPL announced it would acquire wealth management and reporting firm Fortigent.)

LPL Financial CFO Robert Moore.Specifically on the debt refinancing,  LPL  has established a new Term Loan A of $735 million maturing on March 29, 2017, and a new Term Loan B of $615 million maturing on March 29, 2019. It will also maintain a revolving credit facility of up to $250 million. Moore (left) said the new agreements reduce interest expenses, extends maturity dates of the debt, “including our revolver which was to expire in 2013,” and also allows for “the alteration of many covenant structures whose roots go back to 2007.” The new debt structure, he said, gives LPL the ability to continue its growth; being able to do so at a lower cost was “very compelling.”

On the dividend front, LPL will pay a special $2/share dividend, its first, on May 25, 2012 to all shareholders of record as of May 15, 2012. In addition, LPL plans to pay regular quarterly dividends, initially up to $0.12 ($0.48 annually), in the second half of 2012.  However, Moore was quick to point out that those quarterly dividends would still need to be approved by LPL’s board.

Moore said the restructuring and dividend reflected the “primary component to our capital management  strategy." That is, to “invest in organic growth of the business; provide ‘oxygen’ capital" for possible acquisitions; conduct share repurchases to offset any dilution from its option grant programs for management and advisors; debt repayment; and dividends. “We’ve become much more clear about how we use those levers,” Moore said, with Monday’s announcement marking a “key milestone in that process.” The debt restructuring and dividend payment arose out of a “fairly large balance of cash on our balance sheets” from cash flow of the business and from LPL’s IPO in November 2010, which Moore said yielded a set of tax refunds.

With the restructuring, which he characterized as a “one-for-one takeout of debt, so no incremental debt was created,” LPL decided to use "a portion of the excess cash for the $2/share dividend,” or about $230 million, which Moore said would “take free cash down to about $300 million, which is consistent with the size of our business and its cash flow needs.”

Moore concluded by saying the actions “when taken together, constitute a much more firmly established approach to our capital management effort—ability to invest in the business organically; to attract new advisors; enhance growth of existing advisors” and invest in technology.

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